Immediate Annuities

What is an immediate annuity?

An annuity is a contract a party (usually an individual) makes with an insurance agency. The individual pays the insurance agency a premium and the insurance agency pays that insured individual back over time. There are three different types of annuities: immediate annuities, variable annuities, and deferred annuities. (include hyperlinks to the ‘fixed’ and ‘deferred’ pages). These different types of annuities are usually purchased for retirement income.

In an immediate annuity, the insurance company starts to pay back the insured party right away. Payments are made either for a fixed period of time or until the ending of a life. Immediate annuities can seem less attractive than deferred annuities because they do not promise high interest rates, but immediate annuities are also more dependable than deferred annuities. Immediate annuities all come with a guaranteed fixed rate, which means that your premium may increase slightly and is guaranteed not to decrease.

There are four subtypes of immediate annuity:

Life annuity is a contract wherein the insurance agency offers regular payouts until the end of the client’s life. In this type of contract, there are no survivor benefits. All payouts and benefits end at the time of the client’s death.

Period certain annuity entails payouts for a pre-specified period of time.

Life annuity with period certain is a type of annuity where the insurer offers regular payouts until the end of the client’s life. If the insured party’s life ends before this period of time, then the payouts continue to a designated beneficiary.

Joint and survivor annuity contracts stipulate that the insurance agency will provide regular payouts during the client’s lifetime. After the client’s death, the agency will pay a percentage of that income to a survivor for the survivor’s lifetime.

It is important to be aware of the different benefits and limits of each type of annuity. Many people buy one type of annuity with the impression that payouts will continue to their dependent or spouse, only to find after purchase that is not the case.

What are some of the risks related to fixed immediate annuities?

Fixed immediate annuities have the benefit of being a “safe” choice for purchasers; payouts begin immediately and the insured is guaranteed to receive a fixed sum at regular intervals. However, there are a few risks of which buyers – especially the elderly – should be aware.

Some fixed immediate annuity packages are predicated on longevity of the client. The higher the premium that is invested, the longer it will take for payouts to total the amount of the premium, or for the client to “break even.” The amount of time it takes for payouts to match premium is said to be 18 years.[1]If a client purchases life annuity and does not live long enough for the payouts to add up to the premium, that money is lost to the insurance company. Unfortunately, many companies take advantage of this fact to make unethical profits off of life annuities. The types of annuities available that do offer payouts after the client’s death often require much higher premiums.

Decreased purchasing power is another risk of fixed immediate annuities. Immediate annuities have no adjustment for cost of living or inflation. Because immediate annuities usually do not accrue much (if any) interest, the money received in payouts devalues over time due to inflation. Thus, the client loses purchasing power over time.

There is a high annuity company failure risk. Unlike other forms of investments, annuities are not guaranteed by any federal government agency. This means that if the insurance company mismanages finances, the federal government will not bail out the client. In California, the maximum amount covered for life insurance and annuity policies in case of failure of the insurance company is 80% of the premium up to $250,000. If you have invested more than that amount as a premium and the insurance company goes bankrupt, that income could be lost.

Surrender fees are instances of a risk associated with both immediate and deferred annuities. If a client decides to terminate the annuity contract, he or she could be subject to extremely high surrender fees that were not explicitly addressed at the time of purchase.

Why are the elderly particularly at risk with regard to immediate annuities?

Annuity salespeople are encouraged to target the “aging baby boomer” demographic. This segment of the population often has substantial accrued income and is thinking about retirement options. Elderly people are also less likely to outlive their annuity premium, making them a more profitable client base for annuity selling agencies. The fixed rates and long payout periods of most immediate annuities sometimes mean that the client cannot access their funds when they need to. Accidents, medical issues, and other unforeseen events require immediate access to funds that is not easy to do with an annuity. Oftentimes, withdrawing funds will result in an extra surrender fee (see above).

In general, immediate annuities are a more reputable investment than deferred annuities. There are fewer scams and fraudulent practices associated with immediate annuities, but some immediate annuities may not be the best financial choice for seniors who require more flexible access to their accounts.

If you decide that an annuity is the right decision for you, it is wise to consult the credit rating of the agencies you are considering.

What companies are top sellers of fixed annuities?

The following companies are the top 35 annuity companies as financially rated by AM Best, Moody’s, Standard and Poor’s, and Fitch[2]:

• AIG
• Allianz
• American General
• American National
• Aviva
• Axa Equitable
• EquiTrust
• Fidelity Investments
• Genworth Financial
• Hartford
• ING
• Integrity Life
• Kansas City
• Jackson National
• Jefferson National
• John Hancock
• Lincoln National
• Mass Mutual
• MetLife
• Midland National
• Monumental Life
• Nationwide Life
• New York Life
• North American
• Ohio National
• Old Mutual
• Pacific Life
• Presidential
• Protective
• Prudential
• Riversource
• SunAmerica
• The Standard
• Transamerica

The following companies and agencies sell annuities to elderly people:

• American International Group (AIG) Insurance Company
• American International Group (AIG) Insurance Company
• AIG Sun America
• Allianz Life Insurance Company of North America
• American International Group
• American General
• American Equity Life Insurance Company
• American Investors Life Insurance Company (AVIVA)
• American National Insurance Company
• AmerUs Insurance Company
• Conseco Life Insurance Company
• Equitrust
• Fidelity & Guaranty Life Insurance Company
• Great American Life Insurance Company
• Great-West Life and Annuity Insurance Company
• Jackson National life Insurance Company
• Midland National Life Insurance Company
• National Western Life Insurance Company
• Principal Life Insurance Company
• Standard Life Insurance Company of Indiana
• Standard Life Insurance Company
• Sun Life Insurance Company
• Transamerica Life Insurance Company
• Western-Southern Life Assurance Company
• The Western and Southern Life Insurance Company